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Monday, January 7, 2008

Assorted on AEA Meetings

This author spent the weekend in New Orleans at the Annual Meetings of the American Economic Association (AEA). At a session on the subprime mess moderated by David Wessel of the Wall Street Journal I was a panelist together with Paul Krugman, Bob Shiller and Larry White, a housing expert at NYU/Stern; a crowd of over 400 listeners followed the two hour debate and asked probing questions.

The mood at the panel was gloomy. Bob Shiller spoke of the subprime meltdown, of how households are still deluding themselves – in polls – that home prices will keep on rising for the next decade while they have already fallen by 10% in real terms and need to fall by a cumulative 30% before they bottom out (a loss of home values of about $6 trillion); he also argued that the probability of an economy wide recession is now about 75%....

Paul Krugman also summarized the subprime debacle – an “unmitigated disaster” in his words – but he was more cautious and sanguine on whether this housing meltdown and the large financial losses will lead to a recession. In his view the fall in residential investment – as a share of GDP – has been compensated by a comparable increase in the share of exports in GDP (thanks to a weaker dollar); also so far consumption has held up rather than faltering. So maybe a recession will be avoided event if the ugly December employment figures made him a little more cautious about whether a recession can be avoided. So paradoxically Krugman was the most cautious in his assessment of an economy wide recession.

I’m sitting in an AEA session honoring economic historian Ken Sokoloff, with speakers Claudia Goldin, Bob Allen, Jim Robinson, and Nobel prize winner Douglass North. Ken passed away last year at a still young age. It is a tragic thing to eulogize one’s graduate student, as Claudia did today. Teachers, like parents, should not have to bury their own children.